2011 is shaping up to be the Year of the IPO, what with LinkedIn, Pandora and now Dunkin’ Brands (as in Donuts) going public.
Although “initial public offering” is a technical term, referring to a company’s decision to publicly report their financials to the SEC, many investors are drawn to IPOs because of the promise of profit.
Once a company like LinkedIn or Dunkin’ begins trading on the open market, the price per share often spikes.
“But there’s a lot of volatility in that early period,” says Phil Pearlman, executive editor of StockTwits.
These days, some companies only float a small percentage of their shares during an IPO, Pearlman says, which drives up demand—which increases volatility. Dunkin’ plans to float about 20% of its shares.
And ordinary investors tempted by the $16 or $18 initial per share price with Dunkin’ would likely pay a lot more by the time the shares were trading, Pearlman says.
That’s because insiders typically buy up the shares at the IPO price, and trading starts higher. “LinkedIn’s IPO was in the $40 range, but the first tick was over $80,” Pearlman says.
If you can’t resist the sweet temptation of that Dunkin’ IPO, hedge your bets, Pearlman advises.
If you want to buy $20,000 worth of shares, consider buying $5,000 instead. “That way if the price keeps going to the moon, you have a nice chunk. But if it comes back, you’ve removed some of the risk and can add to it at the lower price.”